If I was to ask you what the most important trade is for a CEO of a for profit company, what would your answer be? Would it be leadership? Perhaps a great communicator? Perhaps someone with deep operational experience or someone with profound Industry Insight? Nope. Keep going.
How about someone who is a savvy strategist? Someone who is a shrewd negotiator, or perhaps a wonderful manager of people? No, all of these things, while important are secondary to one skill, every for profit CEO and his or her CFO must possess in spades and that is, they are masters of capital allocation. In a for profit organization. Is there anything more important than creating shareholder value? Sure, you could raise corporate social responsibility, the organization's responsibility to the environment, employees society, but the Are all secondary because if a company cannot attract capital, there is no business.
And make no mistake, this capital demands a return. Lenders get paid interest commiserate with the risk they assume financial leverage that is the degree to which debt is used to finance the business is a tool of capital allocation. However, it's not the prime objective. The prime objective of capital allocation is to maximize the shareholders rate of return. My name is Blair Cooke. And together you and I will consider this idea of mastering capital allocation in this course, including getting a better understanding of what it is, how to think about it, and how we can add more value in our CFO role as a strategic adviser to the CEO and the board of directors.
Jack welch, neutron jack of General Electric is well regarded as one of the greatest CEOs to have ever graced the corporate world. He'll tell you that himself between 1981 and 2001, he generated a compound rate of return of 20.9%. handily beating the s&p index by 3.3 times over that 20 year period, jack welch and body many of those characteristics we described at the outset, all very admirable qualities. However, was he the greatest CEO of all time from a shareholders perspective? The answer is not by a longshot. Here's another name, you probably know.
Well, Warren Buffett, his returns here are not static as he is still the CEO of Berkshire Hathaway the time this course was developed. But for the sake of argument, let's cut it off in 2011. And over the course of 46 years, he has generated a comparable 20.7% compound rate of return. However, that period includes both the oil crisis in the 1970s and the great recession of 2008 these returns have beaten the s&p by get this 101 times. Are you kidding me 101 times, which means that $1 invested 46 years ago would be worth 101 times more had you invested in Berkshire Hathaway, then had you invested in the s&p 500 index? Okay, so we all go to Mr. Buffett is a savvy investor.
What does that have to do with capital allocation? How much of this return is from savvy investing and how much is from capital allocation? In this course, you're going to see that the two concepts are integrally related, and be professional capital allocation requires you to have an eye for value. However, there is more to capital allocation than just investing. Ever heard of Henry Singleton at a company called Teledyne. Neither at eye before a few months ago, tell died, became a public company in 1961 and became a conglomerate of all sorts of companies ranging from aviation electronics to specialty metals to insurance.
Henry Singleton was the CEO of Teledyne for 29 years, delivering shareholders our compound rate of return of 20.4% and beating the market by nine times. Much of the success can be attributed to a singular focus on capital allocation as his primary responsibility as CEO, jack welch and Warren Buffett book in nicely the two ends of the spectrum when it comes to successful CEOs and their view of capital allocation. jack welch was a hands on operator that relentlessly drove performance excellence in each of his businesses. Warren Buffett, on the other hand, has virtually nothing to do with the operations of the companies he owns. He has two rules for those managers of his investi companies. Rule number one is not lose the shareholders money, and the second rule is to never forget rule number one.
Instead, Warren Buffett focuses The entire attention on capital allocation as his singular responsibility at Berkshire Hathaway. This is extremely hard to do. Imagine being a CEO and turning over all operating responsibilities of each investment does someone else yet this is exactly what they do. And if frees their mind to think really big picture, Warren Buffett is not alone. Henry Singleton bill Anders john Malone, Katharine Graham and a handful of other CEOs have practiced this discipline of focusing on capital allocation and have achieved astounding results that first surpass the brute force results of neutron jack. In this course, we will learn more about how capital allocation can be used to supersize shareholder returns without involving ourselves in the underlying businesses at all.
In our first lesson, we will define capital allocation and look at how you can evaluate capital allocation decisions already. By reading a set of financial statements. In our second lesson, we will look at cash generated from operations and the management of working capital. In our third lesson, we will look at the investment of capital including growth, capital expenditures, mergers and acquisitions, divestitures, and spin offs. In our fourth lesson, we will look at how financing strategy should be integrated with capital allocation. In our fifth lesson, we'll explore the uses of surplus cash to pay dividends or repurchase shares.
And finally, in our sixth lesson, we will look at the six traits of highly successful CEOs who have proven after decades of discipline and astounding shareholder returns, that they are truly masters of capital allocation. All studies attribute shareholder return to a CEO because they had the last say on any decision. However, beside every strong CEO should be a strong CFO helping the CEO make better decisions after all these decisions are based on financial theory and analysis. That's your role. So think of the CEO and the CFO is interchangeably in this course because mastering capital allocation requires a strong financial accurate. Are you ready to get started?
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