Tuesday, January 26, 2016


From Ed Chancellor in his introduction to Capital Returns: Investing Through the Capital Cycle: A Money Manager's Reports 2002-15:
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.