Studying Sandy Weill

If you want to be a better investor, you can't go wrong studying successful managers.

For example, I recently read King of Capital by Amy Stone and Mike Brewster, a biography detailing the career of Sandy Weill, because I wanted to identify the attributes that made Weill so successful.

Through a series of acquisitions, Weill built what eventually became Citigroup (NYSE: C  ) into the world's largest banks at $248 billion in market value -- slightly ahead of the $243 billion at Bank of America (NYSE: BAC  ) . In the past 10 years, Citigroup's shareholder return has tripled the S&P 500 and has outperformed other blue chips such as Wells Fargo (NYSE: WFC  ) , Wachovia (NYSE: WB  ) , and JPMorgan Chase (NYSE: JPM  ) .

I believe Weill's brilliance is an attribute of his ability to subtly toe the line between seemingly opposite ideologies. Let's examine some of his management principles.

1. Be aggressively opportunistic, but always with a healthy dose of risk aversion.
All of Weill's companies shared a trademark: They always operated with a stable capital base and didn't engage in risky practices. In 1980, the Hunt brothers engaged in a daring maneuver to corner the world's silver market. Because they were extremely successful at the time, they were able to get huge loans from other banks even while they provided less and less collateral. Years before, Weill had forbidden the Hunts from trading at his firm -- which was Shearson at the time -- because the potentially lucrative business was too risky. After the Hunts' control over the silver market eventually floundered, with the price of silver falling 50% in one day, they eventually had to declare bankruptcy. Bache, one of the biggest banks at the time, got caught in the middle and had to sell itself out to stay solvent.

In the notoriously treacherous financial markets, things are going to bad sometimes. If they go bad enough -- think Long Term Capital Management -- anyone operating without a strong capital base could become severely impaired. Weill knew this, and time and time again throughout his career, he was able to quickly capitalize on competitors' problems. Because he didn't lose his head during bull markets, he always had the healthy capital base to buy up larger and more prestigious competitors, such as the overleveraged Primerica and stumbling Travelers Group, during bear markets.

In the movie Forrest Gump, Forrest becomes a millionaire when his shrimp boat becomes the sole survivor of a severe storm, a stroke of luck that gave him free rein to catch as many shrimp as he wanted. Weill operated on a similar premise, knowing that eventually a storm would come, and so he planned accordingly. Warren Buffett's reinsurance division operates in a similar manner. In fact, Buffett and Weill once had a deal to jointly buy the insurance company Fireman's Fund from American Express (NYSE: AXP  ) , which ultimately declined to sell the division.

2. Relentlessly cut costs, and then spread the wealth.
Weill's usual modus operandi following an acquisition was to engage in some heavy-duty surgery. He cut nearly half of Shearson's total staff and 20% of Primerica's corporate headquarters. Weill was also notoriously wary of bureaucracy. He hated "strategic meetings" but instead surrounded himself with a small group of extremely talented lieutenants to whom he could delegate, a tactic that allowed him to quickly make decisions. Because he was able to correctly identify which employees and divisions were worth their salt, he could then spread the wealth over a smaller base of employees and leave more riches for the survivors. He was one of the pioneers of widely dispensing stock options. He also set up compensation structures with clear operating targets, and he allowed employees to share in any excess profits.

3. Build a prestigious brand, but focus on the nitty-gritty details.
Weill's career started at brokerage firm Burnham & Co., where he learned how to run a back office and avoid operational risks. After doing a big deal, other CEOs often head straight to the nearest bar to engage in some late-night celebratory boozing. However, Weill is known to have stayed up all night following an acquisition, to make sure operational details, such as account transfers, were going smoothly.

Being more operationally disciplined was often Weill's competitive advantage. When competitors got into trouble because of their unruly operations, Weill was often there to clean up the mess. He would buy up the competitor and use his superior back-office operations to absorb the new business, with tremendous operating leverage as a result. When Weill took over Primerica, one of his first hires was operational guru Frank Zarb, whom Weill had worked alongside building the clearinghouse at his old firm.

Weill also preferred the mundane but recurring revenue that other banks shunned. After doing a "flashy" leveraged buyout with corporate raider Saul Steinberg, Weill was quoted as saying, "The next day Saul Steinberg had a business, and we had to start all over again." Weill instead decided to build his business through brokerage, insurance, and asset management -- the kind of businesses that earned stable, recurring cash flow rather than one-off investment banking deals or trading profits. Many competitors focused on the "sexier" areas of investment banking, leveraged buyouts, and arbitrage, which offered high risks and high rewards. Many of these competitors ended up faltering, such as Salomon Brothers, which Weill eventually acquired, following Salomon's problems in its arbitrage division.

Although he focused on the more mundane aspects of business, Weill also knew that building a prestigious brand was critical when it came to asking customers to entrust him with their money. That's why Weill always "traded up" and took on the name of the more prestigious company when he made an acquisition. Starting with Commercial Credit, Weill's company eventually became Primerica, then Travelers Group, and ultimately Citigroup.

4. Achieve the cross-sell.
In the financial world, cross-selling is the equivalent of financial alchemy. The company has to pay an employee only one salary, but if that salesperson can sell multiple products, then margins soon skyrocket. Unfortunately, the ability to cross-sell is kind of like looking for the pot of gold at the end of a rainbow. It seems real, but the rewards never seem to materialize. Selling financial products takes a unique skill, and customers usually like to segregate their purchases. However, Citigroup is one of the few companies that has been able to achieve some sort of success at cross-selling -- it offers commercial and consumer banking, brokerage, credit cards, and investment banking all under one roof. Although it's still a work in progress, Citigroup has probably benefited the most from becoming a "financial superstore."

Who's got next?
As Sandy Weill rides off into the sunset with his impeccable track record, I'm left with a simple question: Are there any others like him? One name immediately comes to mind: Richard Fairbank of Capital One Financial (NYSE: COF  ) , but more on that later.

Bank of America and JPMorgan Chase are bothMotley Fool Income Investorrecommendations. To see what other dividend-paying stocks James Early's newsletter service is recommending, take a free, 30-day trial.

Fool contributor Emil Lee is an analyst and a disciple of value investing. He doesn't own shares in any of the above-mentioned companies. Emil appreciates any comments, concerns, and complaints.The Motley Fool has adisclosure policy.


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