Going through the Outsiders by Thorndike right now.
One really cool perspective he provides is you have to think in terms of being an investor that you might have the resources that you might already own as capital or maybe they were generated by your business, whatever. You have to figure out where to put that in a way to get most amount of return you can. He is mainly talking about CEOs. That okay, you might have the money, you can buy back the shares, you can pay dividends, you can buy another business, you can invest in training of your staff or whatever. There are a lot of things you can do with this money, but the objective is to do what will give you the most return. And then he goes on with how eight great CEOs navigated this. Challenge of investing what you have in the most optimal way.
One common thing he praised among them all was these guys just because they had money or gunpowder they were not itching to just invest it. He noticed that a lot of them just ran their business normally at maintenance level and whenever they saw the opportunity they swung at it with all they had. So they could make really really high conviction play and win. That means a tolerance for a long time for baseline or “inaction” And then swinging for the fences when you see the opportunity.
I saw Alex Hormozzi also talk about something that might help compound this that when you are not sure what to do, you are supposed to build capacity. For example, if you are not sure about what kind of content you want to post, then maybe you can keep observing other people and how content on different platforms actually works. For example, Instagram is basically XYZ in forty seconds while YouTube or books are XYZ for forty minutes or two hundred pages. So, if you don’t know what to do, you can really build capacity for the workflow or get to know the shape of it. Or maybe you have a business, you can streamline your operation and build excess capacity for the next step you are going to get. Or maybe if you don’t know what to do at all, maybe you can continue your job and keep saving money and create capacity in terms of capital that you can. Spend to move forward with the idea whenever you get one. So when you don’t know what you’re doing, you are building capacity.
And these guys also did the same. A lot of times they ran their company like misers, built up capital, and then went after acquisitions that were really really bold. And they also focus a lot on subtraction. If a business or asset is not adding too much value, and maybe if the market is valuing it more than the business itself can get value out of it, then they are happy to sell it. So subtraction is also key. So these guys were really focused on what is the pool they have, building capacity, subtracting whatever was not working really well, and deciding what to double down on or add into.
Know your circumstances, know your context, and invest or don’t invest accordingly.
Most of the time: build capacity.
Occasionally: deploy it.
And every penny your business is able to earn, you are able to prove that hey I can have another ten pennies as debt. I can service debt. So it’s like when you’re building capacity, it is eventually going to lead to revenue, and that revenue is going to be the backbone of the leverage you can take. So Instead of squandering your capital randomly, if you stay patient and build capacity in right way, you are unlocking a lot of leverage in future that can be harnessed in the right directions.
Same can be in terms of skills. You might not know what videos you wanna make, but if you keep studying what makes a great video, you’re building capacity. Soon enough you will make good videos, and based on that you can have sponsorships or partnerships or a business that can leverage it all.
Whenever you are in a period of uncertainty, keep building capacity. And when the opportunity is so obvious that it generates certainty of success, utilize that capacity and swing for the fences. Go for a reasonable bit of certainty. Go for a little risk. Nobody is denying that, but don’t squander your capital after uncertainty. Have a reasonable sense of certainty and deploy your capital, or otherwise you should just keep building capacity.
It is completely okay to have a lot of resources but not have opportunity to deploy them. But to not have resources when there is an opportunity is a travesty. So keep building capacity and when opportunity comes, deploy.
capacity → credibility → leverage → larger opportunity set.
Uncertainty → accumulate capacity.
Increasing clarity → prepare deployment.
High-conviction opportunity → concentrate resources.
After deployment → rebuild capacity.
Mr. Murphy from Capital Cities.
When Thorndike is talking about Murphy, he shows the amount of conviction this guy had. Of course, he was not itching to always take capital allocation related actions, but whenever he had decided to do something, he had conviction. Down to the decimals. For example, he had an a lot of acquisition in his whole career, but he routinely lost auctions where assets were or businesses were being sold. The book mentions that he used to come up like. seventy to eighty percent of the final price in the auction. So he would be glad to let those opportunity go away because someone else was happy to overpay. Mr. Murphy once let an asset go over a five million difference. So not only did he have conviction. But also knew the specifics of that conviction and could stand by it even if it is just a bit outside the range that he had previously decided. That’s the level of conviction that these guys had.
And Mr. Murphy had the responsibility of the capital location and subtractions if any, while he had another guy look at the operations. So the team was fairly split. One guy would look at creating the operating cash flow, and Murphy would decide what to do with that.
So they spent years building capacity, deployed it, and then let the operations stabilize, regenerate capacity once again, and then go on to take another action. This just shows that this system, if worked over decades, is going to create fantastic outcomes. And building capacity is a really compounding activity because each piece of capacity you build with leverage you can expand multiples of that. Just like fractional banking, one rupee deposit can become ten plus rupee of money in circulation, a single unit in increase in capacity can spawn tens and hundreds of additional in future because of their leverage it was able to get to you. And obviously that leverage came because your capacity increased, you showed its credibility. Someone took a leap of faith in you and you got the leverage.
This book is actually changing my mind that it is really silly to cry over not having the results today. Whatever results you have in your head might be minuscule in front of whatever you might actually get if you properly spend your time building capacity and deploying it. The world is really exponential and multiplying. That’s what I understand. Even in uncertainty, you can make the powerful move of building capacity, and that capacity, when you have certainty, can multiply into hundreds and thousands. Like, how is that crazy? Even when you don’t know what to do, if you just build capacity, you are still going to have a huge impact and success.
Like a cheat code when even when you don’t know what to do you are still doing something that is going to change your life.