[REPLAY] Will Thorndike - How Skilled Capital Allocators Compound Capital - [Invest Like the Best, EP.36]

Episode Summary

Executive Summary: Patrick O'Shaughnessy interviews Will Thorndike about The Outsiders and Housatonic Partners. Thorndike explains how exceptional CEOs allocate capital through dividends, buybacks, capex, acquisitions, and debt, and how those lessons translate into private equity, search funds, and long-duration compounding.

Main Topics: Origin of Thorndike’s investing interest (Priority: 7/5): A rainy Maine vacation and John Train's The Money Masters sparked his investing path. How The Outsiders research project evolved (Priority: 9/5): A talk on Henry Singleton became an eight-year study of elite capital allocators. Capital allocation framework (Priority: 10/5): Thorndike defines five uses of capital and compares how great CEOs deploy them. Dividends and tax efficiency (Priority: 8/5): The best allocators generally avoided regular dividends because of taxes. Buybacks, leverage, and acquisitions (Priority: 10/5): Sparse, large, well-timed repurchases and disciplined leverage distinguished winners. Private equity and search funds (Priority: 9/5): He explains Housatonic's strategy, search-fund returns, and current PE frothiness. Operating model and management time (Priority: 8/5): Great firms used strong COOs, decentralized structures, and minimal investor relations.

Key Arguments: Great CEOs were contrarian on dividends, buybacks, debt, and acquisitions. The best buybacks were sporadic and large, timed to low stock prices. Growth capex only worked with explicit hurdle rates and accountability. Debt was used prudently, with leverage matched to business stability. These CEOs favored opportunism over rigid long-term strategic planning. Strong COOs let CEOs focus on capital allocation, not daily operations. Search funds have produced high IRRs, but dispersion is concentrated in top outcomes.

Data Points: research project duration: eight-year - Thorndike studied CEO capital allocators over roughly eight years. number of CEOs profiled: eight - The Outsiders focuses on eight exceptional CEOs. Henry Singleton repurchases: over 90% of shares outstanding - Teledyne repurchased shares between 72 and 84. Teledyne average PE when issuing stock: mid-20s - Singleton issued stock in the 1960s at high valuations. Teledyne PE when repurchasing: high single digits - Singleton bought shares back at much lower valuations. CEO share repurchases: seven of the eight CEOs repurchased 30% or more of shares outstanding - Across the group, buybacks were large and sporadic. ABC cash flow margin before Capital Cities: about 30% - Tom Murphy's acquisition thesis centered on margin expansion. Capital Cities station margin: about 50% operating margin - Murphy aimed to lift ABC stations to this level. margin improvement: 20 margin percentage points - Capital Cities/ABC integration thesis. margin improvement in basis points: 2,000 basis points - Resulting target gap between ABC and Capital Cities margins. capital cities integration timeline: about two, two and a half years - The margin improvement was achieved quickly after acquisition. Malone leverage target: four times cash flow - John Malone set a specific leverage band for cable businesses. General Cinema leverage target: three to four times cash flow - Dick Smith used a similar leverage discipline. public company CEO time on IR: somewhere around 20% - Thorndike contrasts typical CEOs with the outsiders' lower IR focus. search fund IRRs: mid-30s - Stanford's search-fund data show very high average returns. average search fund holding period: seven to eight years - Search funds often compound over long periods. generic U.S. business fit rate: 1% or 2% - Thorndike says only a small fraction of businesses match his criteria. Housatonic fit rate on preselected deals: 10% to 20% - A higher share of sourced opportunities passes the initial screen. target market growth: minimum sort of secular long-term market growth of two times GDP - One of Housatonic's core business filters. target return on tangible capital: 20% or more - Housatonic seeks after-tax returns on tangible capital above this threshold.

Pivotal Quotes: "showing up to steer the ship every day" — Will Thorndike: Describing Singleton's view of management and planning "the probability of bad decisions is very low" — Will Thorndike: Explaining why he would pick certain outsider CEOs as long-term compounders "It's not a game where we think we have an edge." — Will Thorndike: Explaining why Housatonic avoids volatile, highly levered, cyclical businesses

Implications: Listeners should think in terms of incentives, hurdle rates, and time horizon; the open question is which business models can still compound like the Outsiders in today’s frothier markets.