This interview is about finding companies you can hold for decades. Guest Will Thorndike says revenue quality (very low customer churn) matters more than growth. His "Rule of 10": churn rate plus acquisition multiple should be under 10. Key holdings: TransDigm (airplane parts, customers almost never switch), Iron Mountain (data storage, very low maintenance costs), and Constellation Software (extremely decentralized, 500+ units). He also advises buying more during crises, not selling.
Will Thorndike discussed the power of multi-decade holding periods on the Invest Like the Best podcast. His core argument is that companies capable of compounding high returns over the long term share common characteristics: high capital efficiency (return on tangible capital), low maintenance capit
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Guest Will Thorndike is the author of The Outsiders, a former private equity investor, and now focuses on personal investing and the podcast 50X. The main theme of this episode is exploring the common characteristics of companies that can achieve compounding returns over ultra-long holding periods (decades). The most significant judgment of the entire episode: Will Thorndike believes that for ultra-long holding period investments, revenue quality (extremely low customer churn) is more important than growth rate, with the core metric being the "10 Rule": churn rate + acquisition multiple < 10.
Will Thorndike believes that the most fundamental commonality among companies capable of sustaining a multi-decade holding period is not high growth, but "revenue quality"—meaning extremely low customer churn.
Thorndike notes that in the earliest fund of his Housatonic fund, three companies are still held after more than 25 years. The common thread among these companies is highly predictable revenue. He uses TransDigm as an example: its aerospace components are "engineered" into aircraft platforms (like the Boeing 737 or B-52), and replacement requires FAA approval, "which is absolutely never going to happen." This structural stickiness leads to extremely low customer churn, thereby providing revenue predictability.
Thorndike emphasizes that this revenue quality is more important than the growth rate. He proposes a screening framework called the "10 Rule": Customer churn (by customer count) + Acquisition EV/EBITDA multiple < 10. The lower this number, the better, as it represents a balance between predictability and cost. He believes that for the model of building a long-term holding company (through serial acquisitions), "the sustainability of revenue is more important than organic growth."
Capital efficiency is another key pillar, with its core metric being "Return on Tangible Capital" (ROTC).
Thorndike explains the calculation of ROTC in detail: EBITA (assuming depreciation equals capex) multiplied by (1 - tax rate), divided by (net working capital + net fixed assets). His target is 20% or higher. This essentially seeks businesses with low maintenance capital expenditure and low working capital requirements. He contrasts data storage company Iron Mountain (extremely low maintenance capex) with data centers (maintenance capex in the high single digits as a percentage of revenue), pointing out that seemingly minor differences in capital intensity, when compounded over decades, have a massive impact on equity returns.
Thorndike specifically notes that the ROTC metric excludes intangible assets like goodwill, but this does not mean it rejects "intangible-intensive" companies like Google or Facebook. On the contrary, these companies possess "incredible capital efficiency" because of their intellectual property (which is not on the balance sheet). The core of ROTC is to measure a company's ability to convert invested hard assets into cash.
Will Thorndike believes that successful long-term compounding companies generally adopt an "extremely decentralized" organizational structure, which preserves entrepreneurial spirit and capital efficiency.
Thorndike observes that whether it's the companies in The Outsiders or TransDigm, they all employ extreme decentralization. The quantitative metric is the "ratio of headquarters employees to total employees," which is typically 5 to 10 times higher (i.e., lower ratio) for these companies compared to peers. The goal of this structure is to preserve "entrepreneurial spirit" and foster a "frugal, lean" culture. He warns that every time decision-making power is centralized to headquarters, while it may bring short-term cost savings, it leads to "bureaucracy and rigid organizational structures" in the long run.
He uses Constellation Software as an example, which has over 500 business units, each operating independently. The key to this structure is that the CEO must decide which "messiness" is worth tolerating (e.g., not mandating a uniform sales compensation plan), while using "positive peer pressure" to drive improvement by regularly convening business unit general managers to share results and ideas.
Thorndike emphasizes that an ultra-long holding period makes capital allocation strategies distinctly different, especially regarding the "pace" of acquisitions and the use of debt.
Using TransDigm as an example, he points out that one key to its success was early "patience." In the first 4-5 years, TransDigm focused on optimizing the initially acquired business. Only after the EBITDA base was strong enough did it make its next acquisition, which was financed entirely with debt, requiring no new equity. Thorndike calls this the "flywheel effect": once a certain point is reached, subsequent acquisitions can all be completed with debt.
Thorndike believes this strategy is crucial for the long-term holding company he is building (via Compounding Labs). They tend to be "much slower" than private equity firms in the early years (first three years) to build high-quality EBITDA and free cash flow. This allows them to "use leverage very effectively." He specifically mentions that they focus on the debt's available capacity, amortization schedule, and covenant terms, not just the interest rate. This "equity efficiency" is key to long-term compounding returns.
Will Thorndike believes that excellent long-term leaders are both great operators and rational capital allocators.
He uses the example of Karen Moriarty, CEO of Carolon (an assisted living business) held by Housatonic for 27 years. Not only did she build a margin system in a highly operationally difficult industry that is the envy of peers, but she is also a "highly rational, surgical capital allocator." She achieved extremely high equity efficiency by creatively using land ownership and mortgage debt to finance new facilities, and skillfully utilized the balance sheet for tax optimization and sale-leaseback transactions.
Thorndike points out that for investors, developing "conviction" is a crucial but rarely discussed aspect of long-term holding. Using TransDigm as an example, he notes that it experienced multiple "existential crises" during its development, including 9/11, a company-specific scandal (60 Minutes investigation), and the COVID-19 pandemic, during which its stock price was cut in half. Long-term investor Rob Small significantly increased his position during these crises. Thorndike argues that it is precisely these "holding decisions that were not obvious at the time" that create outsized return multiples.
| Position | Analyst Stance | Key Data |
|---|---|---|
| TransDigm | Bullish (Key Example) | Initial equity only $25 million; extremely low customer churn; added to position multiple times during crises |
| Iron Mountain | Bullish (Positive Example) | Customer churn 2%; extremely low maintenance capex |
| Constellation Software | Bullish (Positive Example) | Over 500 business units; extreme decentralization |
| Carolon | Bullish (Held for 27 years) | Early search fund company; CEO is Karen Moriarty |
| Bashurian | Bullish (Held for 27 years) | Early search fund company; potential 50X candidate |
| America's Test Kitchen | Bullish (Held over 25 years) | Niche cooking information business; extremely low customer churn |
| CNX Resources | Bullish (Serves on Board) | CEO Nick Julius reduced IR time to focus on value creation |
| Perimeter Solutions | Bullish (Serves as Co-Chairman) | Currently mimicking the TransDigm model |
1. The "10 Rule" is the gold standard for screening long-term acquisition platforms. (Will Thorndike) The sum of customer churn (by customer count) and the acquisition EV/EBITDA multiple must be below 10. This rule combines revenue predictability with acquisition cost, making it a key quantitative metric for judging excellent "game selection."
2. For ultra-long holding periods, revenue quality (low churn) is more important than the growth rate. (Will Thorndike) When building a serial acquisition platform, it is preferable to choose a low-growth business with almost no customer churn over a high-growth business with high churn. Predictable cash flow is the foundation for using leverage in subsequent acquisitions.
3. "Return on Tangible Capital" (ROTC) is the core metric for measuring capital efficiency, with a target of 20% or higher. (Will Thorndike) This metric excludes intangible assets like goodwill and focuses on a company's ability to convert hard assets into cash. High ROTC means a company can grow with less capital, creating more value for shareholders.
4. Extreme decentralization is the organizational characteristic of long-term success, marked by a very low ratio of headquarters employees to total employees. (Will Thorndike) This structure preserves entrepreneurial spirit and a frugal culture, avoiding bureaucracy. The CEO must learn to "work around some messiness" rather than centralizing all decision-making to headquarters in pursuit of short-term efficiency.
5. The "flywheel effect" of long-term acquisitions begins with early patience. (Will Thorndike) TransDigm made no acquisitions in its first 4-5 years, focusing instead on optimizing the existing business until the EBITDA base was strong enough. After that, all acquisitions could be funded with debt, without further diluting equity.
6. Excellent long-term leaders must be a combination of a great operator and a rational capital allocator. (Will Thorndike) Using Carolon's CEO Karen Moriarty as an example, she not only pursued operational excellence but also achieved extremely high equity returns through creative use of debt and tax planning.
7. For investors, true excess returns come from holding firm and adding to positions during "existential crises." (Will Thorndike) TransDigm experienced multiple crises—9/11, scandal, and the pandemic—where its stock price was cut in half. Long-term investor Rob Small chose to significantly increase his position during these times, which was key to achieving a 50x return.
8. In the face of macro uncertainty, focus on companies with pricing power and low capital requirements. (Will Thorndike) Although Thorndike describes himself as "always bearish," he believes the best way to navigate a high-inflation, high-interest-rate environment is to invest in businesses that can pass costs on to customers and have very low maintenance capital expenditure.