Chapter 4
Do Your Homework No Matter How Much Time It Takes
When I was a kid, my father would occasionally go to the horse races. Sometimes he took me with him, and I watched him lose a few hard-earned dollars from his five-and-dime.
Neither he nor my mom was very happy when I started hanging around the track as a college student. But I thought I could make the ponies my route to a quick buck.
That part of the plan didn’t work out, of course, but I learned some valuable lessons about shortcuts.
I’ve always had a good head for numbers, and for a while I relied on that to get me by. I would look at the odds and go over the horse’s workout times and recent races. I would roughly balance what I hoped to win against how much risk I was willing to take. (It was usually the same then as it is today: a lot.) Some days I would win, and some days I wouldn’t.
Then I thought, why not put a little more work into this? I started to follow the trainers around, taking notes and asking all kinds of pesky questions. Usually they answered, even if they would eventually shoo me away. My bets got a lot smarter, which meant I made some money.
Soon I gave up horses for stocks. That’s when my effort—my homework—really started to pay off. If you spend all your time looking for shortcuts instead of doing what you have to do, you may never reach your goal. But do your homework and put in the necessary effort, and you’ll reap the rewards.
Don’t Waste Time on Shortcuts—They’re Usually Dead Ends
Nearly all “get rich quick” schemes are pure bunk, but every year lots of people are seduced by them. That’s why television shows promising millions of dollars in prizes attract lines of contestants. It’s why a man named Charles Ponzi became infamous and why people continued to invest with Bernie Madoff when common sense should have told them those returns couldn’t be real.
I’m always amused watching movies about people who achieve some big success because often the critical ingredient to their success—the long periods of hard work—is condensed into moments overlaid with catchy music. If there ever was a film version of my life, that montage surely would be my company’s transformation of a small insurance company into a major player in retirement savings. We bought Sun Life Insurance Company in 1971 for $52 million and sold it, as the retirement savings company SunAmerica, for $18 billion in 1998. The intervening 27 years were filled with hard work—most of it directed toward an end I couldn’t see but one I hoped would be profitable.
I had been prepared for that sort of marathon effort by personal experience. When I was a kid, I had fought a lonely struggle with a problem whose name—dyslexia—I wouldn’t learn until doctors diagnosed our son with it decades later. As a boy, all I knew was that it was hard for me to read, and there was no way around that except to read a lot, and slowly, until I got the hang of it. It wasn’t easy. But I got to the point that, as an adult, I could read—and enjoy—four newspapers each morning before work.
Pay Attention to History
I read not only to stay informed but also to get ideas. I read about what other companies are up to, what my peers are doing, where and when the next investment opportunity might be. Whether you’re buying a company, considering changing jobs, or undertaking any serious project, you have to start by doing your homework. It’s important to spend some of your day, every day, learning about the present and the past. Learn from others’ successes and mistakes. History is scattered with clues to the future, but you won’t find them if you don’t look.
At Kaufman and Broad, we saw that the economy of the 1960s was overheating because the Vietnam War was raging and domestic social programs were putting inflationary pressure on the dollar. We had a market cap of $1 billion, and our stock was selling at 40 times earnings. I didn’t think that could last. No matter how shrewdly we ran our company, deep down I knew our industry was cyclical and it was virtually impossible for any homebuilder to thrive when the business climate turned seriously down.
Conventional wisdom was—and is—that the safest diversification is into an industry closely related to your own. For Kaufman and Broad the safe plays would have been a lumber or furniture company. But I wanted something that would see us through the worst imaginable downturn, so I set our team to researching what sort of companies survived the Great Depression. Banks, of course, didn’t do well at all. Depositors drained them of liquidity and, at the time, no federal protections existed to keep them afloat. Mortgage companies, left with huge unpaid home loans when borrowers couldn’t afford payments, tanked.
The companies that seemed to do the best were life insurers. We discovered that even in bad times, everyone who can afford to holds on to their life insurance to provide security for their family, meaning insurance companies kept getting business through the Depression. Those who couldn’t afford their premiums simply let their policies lapse. That meant the insurance company got to hold on to all the earlier payments but had no obligation to pay out on any future liability. Insurance companies could rest on their cash holdings, even if premiums declined and they had fewer customers on their books.
After we figured out that insurers survived the Depression relatively well, we started another exhaustive study: Which was the best insurance company to buy? I wanted one we could afford but with a long and solid reputation. The stable, family-run Sun Life Insurance Company of America fit the bill.
In 1974, Kaufman and Broad suffered its worst year to date and posted its first loss. The decade would only get worse for the economy, with a crushing energy crisis, inflation, and high unemployment that made buying a home impossible for many families. The malaise of the 1970s was quite different from the low of the 1930s. It was caused by an entirely new and, at the time, poorly understood set of circumstances that came to be called stagflation. But the key lesson of the 1930s, that insurers could ride out a severe downturn, still applied. By studying the past, I learned how to give our company, its employees, and its stockholders a better future.
No matter how much our economy evolves, some things never change. If you know history, you know the indicators of a downturn, whether it’s the 1970s or 2009: job creation slows, consumer confidence dips, businesses don’t know how to move toward growth, banks are cautious about lending, and the global financial markets tumble. That’s when you know it’s time to play defense.
Is Core Competency Just Another Term for Complacency?
The kind of CEO who heeds conventional wisdom and thinks with the herd never would have bought Sun Life. Life insurance was about as different from homebuilding as an industry could be. Wouldn’t this new endeavor just become a dangerous distraction that we might mismanage while neglecting our primary business? I seriously considered the question, but if I had reasoned according to conventional logic, I never would have strayed from my “core competency” in accounting and still would be back in Detroit doing other people’s taxes. Sometimes you can mistake what you’re comfortable with for what you’re good at. Unreasonable thinking is your ticket out of that trap.
As I came to realize, our company’s core competency wasn’t in building homes. It was in serving customers, particularly baby boomers. It was in meeting consumer needs at a price point that was advantageous to the buyer and profitable to us. We could do this in any industry. All we had to do was learn our new business from the inside out first—and there was no shortcut to that.
Once You’ve Done Your Homework, Put in the Long Effort—It Will Pay Off in Unexpected Ways
When we bought Sun Life, we started to revamp it. We had no idea at the time that we were going to turn an insurance company into a retirement savings titan, or that we were transforming an old brand into a new and much improved one, or that we were building toward a big merger. We just wanted to run a better insurance company, and all we knew was that Sun Life didn’t run very efficiently.
Most corporate acquisitions fail because companies are as different as people, with their own personalities and cultures. Bringing two firms under one roof rarely goes smoothly. We knew we needed to put in a lot of effort to ensure a successful integration.
I visited Sun Life’s offices in Baltimore every month. I met with heads of departments, watched them work, and assigned some of my executives to figure out how best to improve the business. And we did improve it, steadily every year. We were one of the earliest users of optical imaging technology, which allowed us to turn paper files into electronic ones. (This was another instance of daily research paying off—I first read about optical imaging in a newspaper.) We applied computer software that enabled our agents to hand customers their policies immediately, rather than waiting the customary week or 10 days. After the acquisition of an Atlanta-based life insurer, we moved Sun Life to Atlanta, Georgia, to take advantage of that city’s dynamism. It also pared down our workforce because many employees declined to make the move. Then we moved to Los Angeles, which allowed us to consolidate operations, keep close tabs on the business, and change the company culture from one with hundreds of low-paid clerks to one employing a few high-skilled professionals who were adept at using technology. We also managed to avoid layoffs because, frankly, most of the staff didn’t want to move again.
Big Ideas Don’t Happen in a Moment
It took us years of research on the insurance industry to find the niche where we could flourish—selling retirement products to aging baby boomers. After all that homework, a lot of effort, and the willingness to take a big risk, we had a smart and enormously profitable new business model.
That innovative strategy involved identifying our customers, figuring out what they wanted, and delivering it to them before and better than anyone else. In 1990 SunAmerica began its nearly decade-long run as the best performing stock on the New York Stock Exchange. In 1998 we merged the company with AIG for $18 billion. An investment of $10,000 in Kaufman and Broad when it went public in 1961, including the shares of SunAmerica received in the spin-off, would have been worth $34.1 million at the time of AIG’s purchase. In other words, over that 37-year period, we outperformed even Warren Buffett’s fabled Berkshire Hathaway.
But selling the company never was our goal. That seems to be the holy grail of many of today’s entrepreneurs, fueled by stories of sudden wealth for very young innovators who cash out on a good idea. It may be a fine way to make money, and is the logical step for a business that needs capital or a parent company to expand to the next level. But founders, and anyone involved in a new business, still should act as if they’re building a profitable, stand-alone company. Some great companies offer unquantifiable benefits to their customers—companies that would not have existed with less resilient founders. Mark Zuckerberg avoided the siren song of Yahoo! to keep Facebook independent. Twitter’s Evan Williams, in turn, refused to be acquired by Facebook and Google.
Focusing on a big sale isn’t what creates success. If we had wanted to sell Sun Life, we could have, much earlier and for far less. But our only goal was to build a great business. In the end, it sold at a great price—for me, our shareholders, and our employees.
You Can’t Do It All Yourself, So Ask Questions and Delegate
Sometimes you have to do your research on the run and learn while you’re doing.
When my friend Alan Cranston asked me to chair his campaign for the U.S. Senate in 1968, I knew I had a lot to learn. Although I’m a lifelong Democrat, up until then, I had paid little attention to politics. My father was pretty liberal—he even supported the third-party progressive candidate against Harry Truman and Tom Dewey in 1948. I always had voted, but that was the extent of my participation. When I told Alan I knew nothing about campaigns, he just said, “You’re smart. You’ll figure it out.” I was pretty busy running my company in what was a big year for us. We were expanding abroad and were gearing up to be the first homebuilder to be listed on the New York Stock Exchange. I could easily have told Alan that I just didn’t have the time, or I could have tried to take a shortcut by not doing any research, settling into the role of a figurehead, as many chairs do. But that would have only hurt my friend’s campaign.
Instead I accepted and then read everything I could about campaigning. I became the guy with the info so that Alan could focus on making speeches and shaking hands. I was always ready whenever he asked me questions about voters, donors, issues, and our rival candidate’s platform. His questions, in turn, helped me sharpen my knowledge and skills.
Politics was a new world for me, and I did make some mistakes. I was blunter than I should have been in the media—speaking some harsh truths about our rival candidate, who I thought was a blowhard. I never minced words in business, but I probably should have been a little more artfully unreasonable in politics. Still, I was glad I took the job. At the end of that tumultuous year, Alan won the election and I had learned how to campaign for a cause and how to raise money—two skills that would come in very handy later on.
Like Alan, I make it a habit to ask everyone around me a lot of questions so I always know what’s going on. Some people find this very unreasonable. They’re used to the boss walking into a meeting and saying, “What’s this all about?” Some CEOs think they can get away with that because they’re at the top. Perhaps being underprepared is their way of showing how important they are. In fact, the boss should be the best informed person in the room and should have the good sense to ask questions when necessary. Even in the thick of things it’s important to keep asking questions—and you won’t be able to ask the right ones if you haven’t done your homework. That’s how you turn experience, yours or others’, into an education.