After recently listening to a podcast that had Jake Taylor as a guest, I decided to buy his book “The Rebel Allocator” and give it a read. During the podcast he brought up the story of when his secretary called him and said ‘you’re not going to believe this, but Charlie Munger just called and wants you to call him back!’. After not believing her at first, Jake finally called him back. Charlie said he loved the book, saying ‘I started reading it, and before I knew it, I read the whole damn thing’. Sounds like Charlie. He even recommended Jake to turn it into a movie!
Capital allocation is one of the most important tasks for companies. As Jake Taylor says: “Good capital allocation is the secret sauce of business success and investment returns”.
Charlie Munger also has a great quote on how important capital allocation and return on invested capital is:
“Over the long term, it’s hard for a stock to earn a much better return than the business which underlies it earns. If the business earns 6% on capital over 40 years and you hold it for those 40 years, you’re not going to make much different than a 6% return even if you originally buy it at a huge discount. Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive looking price, you’ll end up with a fine result. So, the trick is getting into better businesses.”
If it’s good enough for Charlie Munger, it’s good enough for me!
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Before we get into the actual book review, I want to do a quick overview on the author, Jake Taylor, first. Jake is an investment professional who is a managing partner and CEO of Farnam Street Investments, which has $25 million + assets under management according to their website. Jake has over 15 years of experience in the finance industry, having previously worked as an investment analyst at Rush Capital Management.
Taylor has a degree in accounting from UC Davis. While in school he won a chance to have lunch with Warren Buffett, which solidified his decision to become a value investor. Between 2009 and 2012 he was also an associate professor at UC Davis, teaching a graduate level class on value investing. He hosts several web series and podcasts such as Five Good Questions, The Hikecast, and Value: After Hours. He is also the founder of Journalytic, which is a great way to manage your thoughts and ideas for investing (it's also free at the time of this writing).
“The Rebel Allocator” is a thought-provoking fictional book by Jake Taylor that challenges conventional wisdom on corporate finance. Using a struggling student (Nick) and a billionaire (Mr. Xavier, aka Mr. X), Jake uses great storytelling to provide a fresh perspective on how companies should allocate capital to create long-term value, not just for shareholders, but also for the whole business and entire ecosystem. The book goes over many lessons of capital allocation, and discusses how each decision has an effect on customers and shareholders. Some of the topics covered are zero-based budgeting, share buybacks, mergers and acquisitions, and how companies should use as little resources as possible to provide the most value.
“.. the heads of many companies are not skilled in capital allocation. Their inadequacy is not surprising. Most bosses rise to the top because they have excelled in an area such as marketing, production, engineering, administration, or, sometimes, institutional politics.” – Warren Buffett, 1987 letter to shareholders
“The Rebel Allocator” follows Nick (who is pursuing a journalism major) around as he goes through struggles experienced by many young people throughout their lives, such as looking for a partner, school, work, work-life balance, and ultimately finding happiness. Nick ends up getting job at private equity firm Big Rock, despite having no financial background. After a year or so on the job, they asked him to go back to business school to get his MBA. During school he ends up winning a trip with some classmates to visit billionaire Mr. X in Wichita, who owns the Cootie Burger business. During the Q&A visit, Mr. X takes a liking to Nick, and asks him to write a book about him, containing many of his business learnings over the years. Nick, having a journalism and anti-capitalist background, was hoping he would be able to use the opportunity to expose some of the billionaire’s secrets, and propel his journalism career.
“Every day, in countless ways, the competitive position of each of our businesses grows either weaker or stronger. If we are delighting customers, eliminating unnecessary costs and improving our products and services, we gain strength. But if we treat customers with indifference or tolerate bloat, our businesses will wither. On a daily basis, the effects of our actions are imperceptible; cumulatively, though, their consequences are enormous. When our long-term competitive position improves as a result of these almost unnoticeable actions, we describe the phenomenon as “widening the moat.” – Warren Buffett
Nick begins to go visit Mr. X on a regular basis, where Mr. X gives Nick lessons on business and capital allocation, and how Cootie Burger became so successful. He starts at the individual customer transaction level, working up to buybacks, mergers and acquisitions, and everything in between. Each visit is a new lesson, which the book does a great job of going into detail and making the lessons easy to understand.
“Start at a customer level, and work backwards.” – Jeff Bezos
The story has many ups and downs, and a few unexpected twists. There were some feel good moments, and some heart break moments, and ultimately Jake did a great job with the ending. Jake also sprinkles Warren Buffet and Charlie Munger quotes throughout the book, normally as letters from Mr. X to Nick before their visits. This is a nice touch and adds value and perspective to the lessons. I’ve included a couple throughout this review. At the end of the book there is also a capital allocation checklist that you can use when looking at companies, to determine if they are doing a good job allocating capital or not.
The reason Jake scrapped his original idea of making a non-fiction book was that he thought it would be too dry and boring. He didn’t want to have a book that no one would want to read be his legacy for his two sons. For that reason, he decided to throw everything he had been working on in the trash and try to tell a fictional story in an attempt to make it more interesting. Having read this book almost 4 and a half years after the original release, I would say he succeeded.
I found it to be a great book, with very relevant information about capital allocation for anyone who either owns a business or invests in businesses. It helped me realize how important capital allocation is within a company, and how to better understand and value companies based on their capital allocation history. Every small change can make a huge difference, for good and for bad. Like Charlie, I had a hard time putting this book down and before I knew it, it was done.
The first book I read on investing was “The Wealthy Barber” by David Chilton. It initially started my interest in investing over 15 years ago. The Rebel Allocator reminded me a lot of the Wealthy Barber in the way it was written, with a fictional story. I’m not one to normally enjoy many fictional books, but these two books were an exception.
If I were to offer one piece of criticism on the book, I would ask for more concrete examples of evaluating capital allocation from an investor's stand point. The book did a great job looking within Cootie Burger at capital allocation from the inside out, but it would have been nice to go over a public company and evaluate from the outside in. The number of chapters also gave me a good laugh at the start of the book, often times having only 1-2 pages per chapter!
Overall, I would highly recommend reading “The Rebel Allocator” to anyone interested in corporate finance, investing, entrepreneurship, or valuation. It offers new perspectives on capital allocation and how important it is within companies. The book is well-written and engaging, with valuable insights into how companies can create long-term value for their shareholders.