The Outsiders Ch. 5: The Iconoclast's Temperament

"The behavior of peer companies, whether they are expanding, acquiring, setting executive compensation or whatever, will be mindlessly imitated." — Warren Buffett, on the institutional imperative, 1989 letter to shareholders

Investment Background

The remaining outsiders ran very different businesses, and at first glance their strategies have little in common.

Katharine Graham took over The Washington Post Company in 1963 after her husband's death, with no business training. She is remembered for publishing the Pentagon Papers and backing the Watergate reporting. Thorndike emphasises something less famous: in the 1970s, on Buffett's advice, she bought back a large share of the company's stock at low prices, while other newspaper companies were spending heavily on acquisitions.

Bill Anders, a former Apollo 8 astronaut, became CEO of General Dynamics in 1991 as the Cold War ended and defence budgets fell. Instead of diversifying to preserve the company's size, he sold the businesses where General Dynamics was not a leader and returned the cash to shareholders. He deliberately made the company much smaller.

Bill Stiritz at Ralston Purina and Dick Smith at General Cinema compounded capital through a mix of spin-offs, repurchases, and opportunistic acquisitions in unglamorous industries: pet food, batteries, soft drink bottling, and cinemas.

Warren Buffett is the eighth. Thorndike treats him less as the subject than as the benchmark and connecting thread, since several of the others were his friends, partners, or directors.

The Wall Street Translation

What They Shared

Thorndike's conclusion is that the eight shared a temperament, not a formula. Several traits recur:

1. Frugality at the centre. Small headquarters, few perks, and constant attention to costs.
2. Decentralised operations. They picked good managers and gave them authority.
3. Capital allocation reserved for themselves. The one decision they did not delegate was where the cash went.
4. Indifference to peers. They did not benchmark their behaviour against what similar companies were doing.
5. Patience followed by sudden action. Long quiet periods broken by large, concentrated moves when prices were right.
6. Little interest in Wall Street's attention. Few earnings calls, little guidance, and no effort to please analysts.

None of this is technical. Any competent CFO understands buybacks, leverage, and hurdle rates. What was scarce was the willingness to act on that understanding when it made the company look strange.

The Institutional Imperative

Buffett's phrase for the force the outsiders resisted is the "institutional imperative": the tendency of organisations to imitate peers, resist changes in direction, and find a use for every available dollar. It explains why boards approve acquisitions at the top of the market and why companies cut buybacks when shares are cheap. Nobody is fired for doing what every comparable company is doing.

The outsiders' advantage came from being willing to accept a different kind of career risk. Anders shrinking General Dynamics was, by conventional measures, a CEO presiding over decline. Graham buying back stock instead of expanding looked timid. Being early and different is uncomfortable even when it is right.

Why the Same Imperative Governs Your Portfolio

The individual investor faces an institutional imperative of their own. It shows up as the urge to hold what friends hold, to buy the sector everyone is discussing, and to feel that doing nothing during a boom is a mistake. It also shows up as the discomfort of rebalancing into the asset that has fallen the most.

A worked illustration: in a year when growth stocks rise 35% and a value index rises 5%, a portfolio set at 50/50 must sell some of the winner and buy the laggard. Every social and emotional signal says not to. That is the retail version of Anders shrinking a company while peers expanded.

The Survivorship Caveat

Thorndike does not hide that temperament alone is no guarantee. For every contrarian CEO who was vindicated, others were simply stubborn and wrong. Concentrated, patient, unconventional behaviour produces both the best and some of the worst records in business history. The eight in the book are selected from the winners.

Executable Rules

1. Identify your own institutional imperative. Write down which investment moves you are tempted to make mainly because others are making them.
2. Separate being different from being right. Being contrarian is only useful when it rests on price and value. Being different for its own sake is just another bias.
3. Pre-commit to the uncomfortable action. Rebalancing bands set in advance, such as rebalancing whenever an allocation drifts more than five percentage points, do the iconoclast's job without requiring iconoclastic courage in the moment.
4. Judge a management team's behaviour against its peers, not in isolation. A company buying back shares when all its peers are acquiring is making a real decision. One doing what everyone else does is following the imperative.

Relevance to a Retirement Portfolio

The outsiders' temperament is extremely rare among CEOs and no easier to find among retail investors. The practical conclusion for a retiree is not to try to become an iconoclast. It is to build a plan that behaves like one automatically.

A low-cost index core with a written allocation and scheduled rebalancing does exactly what Buffett described as difficult. It ignores peers, does nothing for long stretches, and buys what has fallen when a rule says so. The discipline lives in the rules, not in your willpower in the middle of a bubble or a crash.