Royal Little: Ignorance isn't bliss when you're an investor

Another story from Textron founder Royal Little (1896-1989), author of "How to Lose $100,000,000 and Other Valuable Advice." In spite of his wealth of mistake stories, Little was one of the most successful US businessmen of the mid-1900s.

MEDICAL OPINION AND REVIEW


During this period of rapid expansion, we noticed that the stocks of publishing businesses were selling at an unusually high multiple, and, although we had had no experience whatseoever in the publishing business, we thought it might improve our multiple of we bought a couple of businesses in the field.


The first one that was brought to our attention was Medical Opinion and Review, which was owned by two individuals. They had built a very profitable operation providing the doctors in the country with up-to-date information on all medical research and other medical information in summary form so that the doctors could get this information without having to read all the complicated medical journals and other sources.


They built up pretax earnings of $1 million, but since they had no fixed assets and only receivables from the drug manufacturers who were supporting the operation with their advertisements, the company had very little net worth. In October 1969, we made arrangements with the owners to buy their stock for $4.5 million in cash, or approximately nine times aftertax earnings. The sellers had to pay capital gains taxes on the transaction, but they both ended up as millionaires. We had hoped, of course, that they would work as hard in the future as they had in the past and that our investment would prove to be a successful one.


Unfortunately, the partner who did the editorial work providing the important information for the publication decided that he wanted to retire. The other partner, who handled the distribution and solicitation of advertising, was left without a competent editor. As a result the advertisers discontinued using the publication to reach doctors and Medical Opinion and Review suddenly became a loser instead of a winner.


Since our experience in the past had been primarily with manufacturing operations, we had no one in the organization competent to rehabilitate that division. After that disaster, we practically gave the business back to the remaining former owner and took our loss.

ADVICE #1: Don't get involved in the publishing business if your principal business has been manufacturing - particularly if you have made the former owners wealthy.

ADVICE #2: (This second bit of advice applies to all types of acquisitions.) Be very careful not to buy businesses that have earnings but no net worth. If the earnings evaporate, you have no escape route to recover any portion of your investment.