Capital Allocation
A copy of an email we recently sent to leaders of companies we invest in and other friends in the industry
We sent the email below to leaders of the cannabis companies in which we’ve invested, and some other friends of ours in the industry, a few weeks ago. We are sharing it verbatim with Bengal Bite subscribers in case they find it interesting.
Unfortunately, the offer to buy a copy of The Outsiders by William Thorndike was only for the email’s original recipients. We encourage those who have not read it to buy a copy though - a used version is under $10 on Amazon.
If you are not interested in capital allocation, we recommend reading the seminal coming of age novel The Outsiders by S.E. Hinton instead - or at least watching Francis Ford Coppola’s movie version.
We often talk about the importance of capital allocation and how we view it as one of, if not the, most critical aspects in both business and investing.
The Outsiders, a book by private equity partner William Thorndike, profiles eight CEOs that were all excellent capital allocators and helped generate returns significantly higher than even a “benchmark” great CEO (Jack Welch, although his legacy is now in question). It is deeply researched, well written, and a quick read. We ask that you read this book in the next month if you have not read it previously (it’s mercifully short and to the point) - and we are happy to send you a copy if you do not have one. Please let us know if you need a copy and your address. We think the book is a great foundation on which to have discussions with any of you about your businesses, and we hope to set up some of those conversations after you’ve had a chance to read it.
Some other articles, presentations, and podcasts below are ones that we also found very interesting and useful, but we thought The Outsiders was the most essential thing to read on this topic if you are short on time.
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One of Thorndike’s long term investments is Transdigm (NYSE:TDG), a speciality aircraft component manufacturing rollup which went public in 2006 at $25 and recently closed at just under $525 per share - a CAGR of >21% per year. There are many aspects of Transdigm’s philosophy that we think are adaptable to the cannabis industry, and Transdigm’s CEO, Nick Howley, is very much worth listening to:
Transdigm Foundations - 50x Podcast -
Transdigm Capital Allocation - 50x Podcast -
While not Transdigm specific, this general interview with Thorndike on investing, capital allocation, etc., is also worthwhile: podcasts.apple.com
Some more interesting things:
Thorndike made some of the initial research for his book public. This presentation on Capital Cities/ABC is a thorough and interesting read: Capital Cities: Briefing
This episode of Business Breakdowns (a great podcast where each episode is a deep dive into how a particular business operates and what makes it tick) on Costco is worth a listen. Especially interesting to us was how many investors initially missed Costco’s great returns on capital because they couldn’t see through accounting losses:
Jeff Bezos’ 2004 Letter to Amazon Shareholders (the top couple pages of this link: https://www.sec.gov/Archives/edgar/data/1018724/000119312505070440/dex991.htm) is a short and sweet discussion of capital allocation and free cash flow. Amazon was founded in 1997 and got hurt in the dotcom bubble, but they never stopped focusing on the core of their business and communicating the same to their shareholders. It took years, but once investors bought into the story the returns were incredibly high.
Another business with a similar decentralized philosophy to Transdigm is Amphenol. Here’s their LinkedIn profile, which highlights the culture they’ve established: https://www.linkedin.com/company/amphenol/life/49823b30-b095-41b0-9bee-187f0629cb5d/. For those that have met Timeless’s President, Josh Hirschey, he hails from Amphenol.
Please send us any reactions you have - we are always game for discussions and debates on these topics, especially as they apply to cannabis. And please do let us know if you have not read The Outsiders - it’s a book we really enjoy sharing with people.
Thank you,
Bengal