The essence of capital cycle analysis can thus be reduced to the following key tenets:
- Most investors devote more time to thinking about demand than supply. Yet demand is more difficult to forecast than supply.
- Changes in supply drive industry profitability. Stock prices often fail to anticipate shifts in the supply side.
- The value/growth dichotomy is false. Companies in industries with a supportive supply side can justify high valuations.
- Management’s capital allocation skills are paramount, and meetings with management often provide valuable insights.
- Investment bankers drive the capital cycle, largely to the detriment of investors.
- When policymakers interfere with the capital cycle, the market-clearing process may be arrested. New technologies can also disrupt the normal operation of the capital cycle.
- Generalists are better able to adopt the “outside view” necessary for capital cycle analysis.
- Long-term investors are better suited to applying the capital cycle approach.
Tuesday, January 26, 2016
THE TENETS OF CAPITAL CYCLE ANALYSIS
From Ed Chancellor in his introduction to Capital Returns: Investing Through the Capital Cycle: A Money Manager's Reports 2002-15: