Chapter 11 - Memos from the Chairman
Today’s Chapter is based on the book “Memos from the Chairman” by Alan “Ace” Greenberg.
“Ace Greenberg did almost everything better than I do—bridge, magic tricks, dog training, and arbitrage—all the important things in life.”
—Warren Buffett
Buy it on Amazon here:
https://www.amazon.com/Memos-Chairman-Alan-C-Greenberg/dp/1523501324
Here’s what I have learned from the book:
Back to the Basics
“Make everything as simple as possible, but not simplier.”
— Albert Einstein
Alan “Ace” Greenberg is well known as the legendary chairman of Bear Stearns. For him, the key to having a successful business is similar to football: you need to execute the fundamentals better than your competition.
“Remember that the Green Bay Packers won because they executed the fundamentals better than their competition. Trick plays make headlines, but winners execute the basics.”
— Alan Greenberg
As such, he once wrote the following fundamental rules to follow:
Stick to thine own business
Watch thy shop
Limit thy losses
Watch thy expenses like a hawk
Stay humble, humble, humble
When dealing with a new account, know thy customer and know thy customer’s money is up
Although these rules may seem easy to follow, Greenberg warns that it is very easy to start being complacent and sloppy and to lose sight of the fundamentals during good times. As a matter of fact, Greenberg mentions that it is even more important to cut expenses during good times and to not leave anything on the table.
“After a month like the one we just experienced, I think we should be on our guard against the negatives that go along with great success. I am speaking of complacency, sloppiness, relaxing on expenses, cockiness and just getting careless in general. This is the time to be on our guard.”
— Alan Greenberg
“We should not lose sight of fundamentals, such as cutting expenses and being ever alert to the fact that if we are not careful, there are some people who would like to steal the whole place out from under us. He pointed out to me that the tendency is to cut expenses when things are tough and how stupid that line of reasoning is. When things are good, you should be even more careful of expenses because it is ridiculous to leave anything on the table when you hold a royal flush. We must continue to be alert, aggressive and never complacent.”
— Alan Greenberg
By consequence, it isn’t as simple as it seems to stick to the fundamentals, especially for a very long time. As a matter of fact, boredom and impatience can lead an individual or a company to lose focus on the basics and lead to mediocre results.
“The difference between good and great results is often found in doing the boring things you know you should do when you don't feel like doing them.”
— Shane Parrish
This was also pointed out by Tom Monaghan in his autobiography “Pizza Tiger”. Monaghan says that it is very easy for entrepreneurs to get sidetracked and lose focus on what made their business successful in the first place.
“It amazes me how often owners of a restaurant will fail to exploit a successful business in favor of something different. I’ve seen it happen many times: A business is built up over a period of years and becomes a great restaurant. Then, instead of paying attention to all the details that made that restaurant great and building on them, the owners begin to look for other things they can do. They go into sideline businesses or start building other restaurants that drain attention and energy away from the first one.”
— Tom Monaghan
For Alan Greenberg, his own method of staying focused is to remind his company’s employees that customers and competitors do not care about their past record and that tomorrow’s another game. Not only that, he expects his company to improve and to do better than the previous year.
“The year was over last Friday and it was a good one, but last year is gone. The score right now is nothing to nothing. Nobody cares (especially our competition) what we did last year.”
— Alan Greenberg
“This place is rocking and our job is to keep it rolling. Everything is going our way. On July 1, 1992 the score is nothing to nothing. Join me in seeing that we set new records. If we have another record breaker, maybe we can get the multiple to six.”
— Alan Greenberg
“Clients are not interested in our past triumphs (that is why 90% of our competition has disappeared over the past 20 years). Clients want service, ideas and tender loving care. The new year is here and remember that records are made to be broken. Let us get ten runs in the first inning and then knock the cover off the ball!”
— Alan Greenberg
Contrarian View
“If you want to have a better performance than the crowd, you must do things differently from the crowd”
— John Templeton
In a previous Chapter on Isadore Sharp, we learned how Four Seasons was able to earn market shares in the competitive hotel industry due to the antifragility of the company. Similarly, Alan Greenberg was a contrarian compared to his competitors. As a matter of fact, while other companies would have hiring freeze during recessions, Greenberg believed it was the best time to hire talented people or as he calls them number one draft picks.
“We are not panicking; we are not laying off people, but we are making a real effort to cut expenses. The other side of the coin is we have hired a large number of number one draft picks in the last few months. This is the time to hire good people. We have followed this policy in the past, and I am convinced that we will be proven correct once again.”
— Alan Greenberg
“Bear Stearns is not having a hiring freeze. Our experience has been that the best time to hire productive people is when conditions are difficult. Some areas of Wall Street are having problems and that means opportunity is once again knocking at our door. Let us all be alert and continue to build!”
— Alan Greenberg
“Here we go again. Business is tough. The Dow Jones index dropped almost 200 points a month ago. Firms are announcing major layoffs. What is our posture at this time? Your executive committee feels we should be hiring, not firing. This is the time to pick up great people. This position may amaze some newer associates, but those of you who have been exposed to our culture will not be surprised by this move. Being a contrarian has worked for us in the past and it will work again. Spread the word—we are hiring, not firing. The flip side is that our associates should be relieved and maybe the people who work here will even appreciate what a great place this is to build a career.”
— Alan Greenberg
As we have touched previously, Bear Sterns enjoyed hiring people with PSD degrees — poor, smart and a deep desire to become rich. This was another example of Greenberg’s contrarian view as his competitors were restricting themselves to only hire individuals with MBA degrees.
“Our first desire is to promote from within. If somebody with an MBA degree applies for a job, we will certainly not hold it against them, but we are really looking for people with PSD degrees. They built this firm and there are plenty around because our competition seems to be restricting themselves to MBA’s. If we are smart, we will end up with the future Cy Lewises, Gus Levys and Bunny Laskers. These men made their mark with a high school degree and a PSD. * PSD stands for poor, smart and a deep desire to become rich.”
— Alan Greenberg
Being a contrarian in business is certainly a great way of finding a competitive edge over the competition. This is equally right in investing as from the famous saying of Warren Buffett: “Be fearful when others are greedy, and greedy when others are fearful.” However, while being a contrarian in itself isn’t hard — anyone can say the opposite of what crowd believes, you must also be right to have an advantageous divergence in investing. This can be extremely hard. Not only that, timing is also an important factor for successful contrarian investing.
“Markets can remain irrational longer than you can remain solvent”
— John Maynard Keynes
Howard Marks, author of the book The Most Important Thing, is one of the most known contrarian investor. In his book, he coined the term “second-level” thinking as a way of having a contrarian view compared to the rest of the market who are first-level thinkers.
“First-level thinking is simplistic and superficial, and just about everyone can do it (a bad sign for anything involving an attempt at superiority). All the first-level thinker needs is an opinion about the future, as in “The outlook for the company is favorable, meaning the stock will go up.” Second-level thinking is deep, complex and convoluted.”
— Howard Marks
Cutting Expenses
“You can always cut costs. Any idiots can cut costs.”
— Tom Monaghan
For Greenberg, Bear Sterns’ success should be evaluated on its Return on Equity (”ROE”). And the secret to improve its ROE is simple: to increase revenues while cutting expenses. However, considering that sales are quite dependent on various external factors, Greenberg prefers to focus on what he can control: cutting expenses.
“Our goal still remains—a high return on equity with integrity.”
— Alan Greenberg
“The only statistic I care about is return on equity. After many sessions with some of our business school graduates (yes, we do have some), I think they have helped me understand the secret to improving our R.O.E. It seems that if we increase revenues and cut expenses, return on equity goes up and that is what makes me happy. Please make me happy! I can be very unpleasant when I’m not.”
— Alan Greenberg
“When we cut expenses we have a direct, equal and positive impact on our bottom line. If we forget this fact we will be a member of the “Losers Club” and stupid. That is one club that we are not joining.”
— Alan Greenberg
As such, Alan Greenberg was an expert at cutting cost and he made sure to remind his employees to do so in his various memos. One way he did this was by asking his staff to save up on office supplies such as paperclips, rubber bands and scotch tapes. While these may seems excessive, there is no need remind you that even a small expenses can compound into a big ones at a large scale.
“I have just informed the purchasing department that they should no longer purchase paper clips. All of us receive documents every day with paper clips on them. If we save these paper clips, not only will we have enough for our own use, but we will also, in a short time, be awash in the little critters. Periodically, we will collect excess paper clips and sell them (since the cost to us is zero, the Arbitrage Department tells me the return on capital will be above average). This action may seem a little petty, but anything we can do to make our people conscious of expenses is worthwhile.”
— Alan Greenberg
“Because of your cooperation, I would like to extend our cost-cutting efforts to a larger matter. Bear Stearns will no longer purchase rubber bands. If we can save paper clips from incoming mail, we can save rubber bands, and my hope is that we can become awash in those little stretchies also.”
— Alan Greenberg
“Rubber bands can be used even when they break. Take the ends and tie a square knot. If you need to know how to tie a square knot call Bobby Steinberg. He has a cub scout troop consisting only of his sons.”
— Alan Greenberg
“All of us use blue envelopes for sending written material around the office. Our team has done a great job of saving these envelopes and reusing them, but our scotch tape expense has gone up. From this day on, instruct your secretary to lick only the left side of the flap when sending the envelope. The reason for this will amaze you, and make you wonder why you did not think of this yourself. If the envelope is gently opened by the recipient, it can be used again and sealed, without using scotch tape, by your secretary licking the right side of the flap and then sealing it. After all of us have become accustomed to accurate and precise licking, a further extension of this will be to lick only the left third, and then the middle for the next trip, and the right side for the penultimate voyage. If one has a small tongue and good coordination, an envelope could be opened and resealed ten times.”
— Alan Greenberg
And it didn’t stop there, Greenberg was also on the lookout for new ways of cutting costs and to improve the company’s bottom line. For example, after realizing that the company’s electricity bills was over five million a year, he required his staff to turn off the lights when they leave a room or call it a day to save on electricity bills. He also requested them to use U.S. Mail over Federal Express as he considered the latter a luxury after being charged an invoice of $68.32.
“I have never enjoyed the smell of money burning, particularly when it is my money. The careless wasting of electricity is burning money. (Our electrical bill is running at the rate of five million a year.) From this day on we have two revolutionary new rules. Turn off lights when you leave a room and turn off equipment when you call it a day. “
— Alan Greenberg
“I checked on how much I was charged for Federal Expressing packages to my clients, and the figure for the past 11 months was $68.32. One of those charges was for a package sent to Haimchinkel Malintz Anaynikal. That should be a firm expense, but I am not going to make a big thing out of it. My point is that Federal Express is a luxury, and business can still be done by using the U.S. Mail. I can assure you that future use of Federal Express is going to be very closely monitored. The fact that it wasn’t up to now is my fault, and I take full blame.”
— Alan Greenberg
Beyond the Book
Read "Boredom & Impatience" by Farnam Street
Read "Second-Order Thinking: What Smart People Use to Outperform" by Farnam Street
Watch "What All Great Investors Do To Make Big Bets, But Never Say" by The Knowledge Project