Not sure where you got your telltale from. Do you mean the hole shown in this picture? If so, that is a relic from the days of water heated automatic chokes. Those were 1/4″ hoses in the choke application, so I doubt your 1/8″ telltale is a problem.

Those motors are as happy as any are when on muffs. I don’t think you were supplying enough water to the muffs.

Your engine has the more complicated water pump that recirculates water back to the pump to help warm it up….The two water tubes are tough to line up unless you use the little plastic sleeves. These sleeves are usually found stuck up on the water tubes… Did you have the thermostat apart? There is a recirculation check valve in there that must be in place and working properly or cooling water will just short circuit back to the pump without circulating through the block…
You shouldn’t be seeing any steam coming from the telltale….

Well, usually the tap for the telltale on these engines is located on the exhaust cover, which is at the beginning of the cooling cycle. But, your exhaust cover does not have a provision for this…Plus, your engine has that return check valve, so not too sure what pressure values you might see. Water pressure gages were introduced for later model engines with the single tube cooling system..
I think you are correct in putting the engine/boat in the water and trying it out, that way you can monitor your telltale. Once the initial air has bled out of the block, you should not see any air or steam spurts….Does your control box have an overheat warning horn? If so, have you checked to see if it is operational? This is another good way of monitoring engine temp. Unfortunately, these things can overheat in an instant, oftentimes you won’t have a chance to see the loss of pressure from the telltale, and the warning horn comes on as the engine is seizing up when overheating occurs at high speeds….
So, I would give it a trial run on the water, have an assistant drive while you monitor the telltale to catch an issue before it overheats badly.

I agree, surely would not pull that water cover off the head in order to check the operation of the temp switch. But, I would surely ground the tan harness lead with the key turned “on” to make sure the horn works OK.
And yes, that tap in the block is at the top of the block, but I would think that the telltale hose would clear out any air bubbles fairly quickly. But, again, I have never tried using this port for a telltale tap on one of the older engines….
I think your plan of taking the boat to the water and trying it is the best bet. But, again, bring an assistant to monitor the telltale output just in case there is an actual cooling issue…

Not sure I understand what you are asking about with the timing grid(s), perhaps if you posted a picture…..Once again, there is no “idle timing” setting for this engine, the 5 degreeBTDC setting is checked when the throttle cam line bisects the throttle roller.
Try sliding the rubber sleeve back on the tan lead, then grounding it with the key on, perhaps you are not making a great ground connection.
And yes, the WOT timing has to be checked with the engine actually running at WOT. Impossible with ear muffs, very dangerous while driving the boat, the best/safest method is backing the boat in the water with a test wheel, which I’m sure you don’t have. You haven’t disturbed the WOT timing screw setting, so I would leave it alone. If anything, I would just turn it inwards a couple of turns to retard WOT timing just slightly.