The best part of most business books is the historical perspective they provide of companies we're interested in researching for investment. The past may not be prologue, but it provides great context. What crisis has the company faced in the past? How did it manage? How has it transitioned from one product line or business focus to another? Without concrete examples from the past to help us frame the way we think about the company's future, we're just treading water as investors.
It's too easy to read one or two annual reports and think we understand a business. Ben Graham, the father of financial analysis, warned investors not to take a single year's earnings seriously. We need to take a broader look at a company's progress to get anything more than a postage-stamp sized view of a business -- say about 10 years when it comes to earnings.
Given this, it's worth the time it takes to read James Collins and Jerry Porras' 1994 best-selling book, Built to Last, a study of 17 of the world's most respected companies.
This book changes the investor's perspective in terms of longevity, given that many companies we regard as great today, such as Cisco (Nasdaq: CSCO), have only been around 15 or 20 years, a fraction of the time companies showcased in the book -- such as General Electric (NYSE: GE) and Procter & Gamble (NYSE: PG) -- have been in business.
This book also changes our perspective in terms of profitability. The best companies seem to know profits always flow from attention to core values, the sometimes-squishy ideas about respect for employees, putting customers first, and dedication to innovation. Making money is essential to survival, of course, but it's not the reason the best companies are in business.
Further, the book changes our perspective on leadership. Collins tells us that, if they're backed by the full faith and credit of an exhaustive research effort, executives don't have to be charismatic, me-first types like Oracle's (Nasdaq: ORCL) Larry Ellison to build great businesses. No, men such as Minnesota Mining & Manufacturing's (NYSE: MMM) William McKnight, a onetime accountant, quietly separated 3M from the pack during his tenure by encouraging innovation and free thinking.
And it really changes our thinking about management and culture. Great companies hire the right people, dedicate resources to training them, and keep them happy. It's the difference between building a great business and riding one or two product lines. Those companies that do the latter we want to avoid like the plague.
Last week, when Southwest (NYSE: LUV) Chairman and CEO Herb Kelleher announced his successor, he said, "Succession planning has been a major priority at Southwest for quite some time." The Southwest culture may flow from Kelleher, but it isn't limited to him. Investors shouldn't be surprised if the company performs well without Herb at the helm.
As a business book, Built to Last is really an exception in that it's chock full of great business lessons and business history. The details about drug company Merck (NYSE: MRK), in particular, and GE's obsession with grooming great managers, are priceless.
In contrast, most business books are like Vivaldi -- one nice tune played over and over. My favorite example, The Gorilla Game, is really one idea sandwiched between two book covers. Its core message, that it makes good sense to hunt for companies with proprietary architectures and high switching costs, is a powerful tool, but it shouldn't take 300 pages to flesh out. Most of the book is just a frustrating effort by the authors to create their own hierarchy of business jargon, a kind of literary proprietary architecture.
So, how can investors get a sense of a company's long-term track record? One of the best ways to get the bigger picture is through a trip to your local college library. Just start searching the periodical guides for articles and read everything that catches your eye in the microfilm room. Over time, with enough articles, a clear picture emerges of a company's history, industry, and character.
Some of it is available online. Thankfully, Fortune and Forbes have archives running back a few years. This is the starting point. Both magazines, especially Fortune, provide great coverage despite a fascination for 20-something executives and celebrity CEOs.
More and more will be available online in the future, hopefully, but for now an old fashioned, back-to-the-future trip to the library is a great beginning.
Have a great day.
Richard McCaffery lives in Laurel, Maryland, off beautiful interstate 95. He doesn't own shares in any of the companies mentioned in this article. The Motley Fool is investors writing for investors.
