Connor Leonard - Capital Light Compounders & Reinvestment Moats

Principles & Lessons:

• Long-term investing edge comes from aligning process with intrinsic investor personality and organizational structure. Connor Leonard emphasizes that IMC’s structure—no benchmark, no external capital, no liquidity pressure—enables true long-term thinking: “I can legitimately apply a 5 to 10 year time horizon… whereas most of our peers are on a 3 to 6 month horizon.” But this structure only works because his temperament fits: he enjoys “looking at hundreds of companies a year and only pulling the trigger on one,” holding concentrated positions with patience. The edge is not just analytical, but epistemological—rooted in aligning belief-formation, incentives, and decision-making environments to favor uncommon persistence over common prediction.
• The true analytical challenge is dynamic intrinsic value, not static mispricing. Leonard critiques the static dollar-for-fifty-cents framework of early value investing, observing that markets have become too efficient for such obvious arbitrages. Instead, he focuses on businesses with “reinvestment moats” where intrinsic value is increasing over time. The key is not in estimating a fixed present value, but understanding the internal engine of compounding. As he puts it, “I'm not as much looking to buy a business at a discount to intrinsic value and sell it… I’m looking to latch on for the ride as it goes from $1 to $2.” Valuation becomes probabilistic reasoning about future capital deployment, not arithmetic about current cash flows.
• Reinvestment rate at high returns—not just high return—is what creates exponential value. Leonard distinguishes sharply between “legacy moats” (e.g., Coca-Cola, which “earn incredible returns on capital but have nowhere to put them”) and “reinvestment moats” (e.g., early Walmart), which both earn high returns and can reinvest at scale. Legacy moats preserve value, but reinvestment moats compound it. He notes that Walmart in 1972 earned a 52% return on tangible assets and still had “endless runway,” producing 5,000x growth in earnings over decades. The second derivative—how much high-return capital can be allocated—is the fulcrum of long-term investing.
• Capital-light compounders create exceptional economics, but require rare discipline in capital allocation. In the best cases, capital-light businesses with negative working capital and recurring revenues—like classifieds, subscription networks, or domain registries—generate “extraordinary free cash flow without needing to reinvest.” But this advantage creates a new risk: “What if they buy something crazy?” Leonard emphasizes that capital-light compounders must be paired with exceptional allocators to be durable. Verisign, with “70%+ margins and a board run by Louis Simpson,” is an example where cannibalistic buybacks and capital conservatism combine to create structural compounding without fragility.
• Two core business models that widen moats over time are scale economics and network effects. Leonard observes that most businesses degrade over time as competition erodes margins, but a small subset “actually get stronger as they grow.” He highlights two: scale-based businesses like Amazon and JD.com, where larger volume lowers per-unit cost, and network-effect platforms like classifieds or marketplaces, where liquidity begets liquidity. In both cases, the moat widens as the company grows. “I’m greedy,” he says, “I don’t just want a moat, I want a moat that widens over time.”
• Quality in management is often legible through narrative structure, incentive alignment, and frugality—not short-term performance. Leonard looks for “outsider” CEOs who write thoughtful shareholder letters, own significant equity, and act like long-term principals, not short-term executives. He seeks subtle signals of orientation, like “a bland brown cover on the annual report for 20 years,” or a CEO who “flies coach even though he’s 6 foot 7.” These signs reflect worldview and capital discipline, not marketing polish. A great business with mediocre capital allocators is vulnerable; a legacy moat run by a great allocator, like TransDigm, becomes a private equity engine without the 2-and-20.
• A journalistic mindset—relentless curiosity paired with focused inquiry—can outperform traditional investment analysis. Leonard divides his research process into “board member” and “journalist” modes: first simplifying to the 3–5 variables that drive a business, then going deep with investigative intensity. For Zooplus, he translated German websites and manually price-shopped 50 SKUs across markets to ask, “Why would a European consumer buy here instead of Amazon?” He treats each investment idea as an assignment, recognizing that the key epistemic move is not to learn everything, but to ask the right questions—and answer them better than others with more time or budget.
• Concentration is not a risk if the decision is correct—diversification dilutes conviction when edge is scarce. Leonard openly contrasts institutional investing, where 50 bps positions dominate, with how professionals invest their own money: “a 30% position in a single stock.” At IMC, he has five to ten positions, with starter positions at 5%, and core positions much larger. He sees concentrated ownership as a rational consequence of rare, high-confidence insights: “If I’m right, it will work out really well. And if I have enough margin of safety, even if I’m wrong, I’ll live to fight another day.” The portfolio is epistemically lean—built not on broad exposure, but on rare moments of clarity.

Transcript